What are investment assets and what types of assets can I invest in?
Investment assets are instruments – tangible or intangible – that are held for the purpose of producing income or an increase in value. Investment assets can be grouped into classes that share similar characteristics. In this article, we’ll highlight some of the most common asset classes and show you how understanding their characteristics can help you as an investor.
The four main financial asset classes are cash, fixed-income securities, equities and derivatives. Other notable asset classes include commodities, real estate and cryptocurrencies, among others. Then there are alternative investment asset classes, like artwork, fine wine, vintage cars, stamps, antique jewelry and other collectibles. Remember when a pearl and diamond pendant that belonged to French Queen Marie Antoinette was sold for a record $36 million at a Sotheby's auction in 2018?
Why is it important to understand asset classes?
Understanding asset classes can help you determine the optimal asset allocation of your portfolio. The performance of different asset classes is usually not correlated, or sometimes even inversely correlated, so having multiple asset classes in your portfolio is a good way to diversify. For example, real estate and gold may perform well during a bear market for stocks in an economic downturn. Spreading your investments across different asset classes may therefore help you reduce your risk exposure.
If you prefer investing in a single asset class, understand how your chosen assets stack up against each other and learn about further sub-classifications that may help you hedge your investments.
Assets within each asset class will, of course, differ vastly. However, there are some general characteristics that can help you understand:
- what the asset derives its value from
- the expected risk/return profile of the asset
- the liquidity of the asset (meaning how quickly you can convert your asset into cash)
- how general economic conditions may affect the performance of the asset
The main financial asset classes
There are four main financial asset classes:
- Cash and cash equivalents
- Fixed income securities (What is a bond and how to buy it?)
- Equities (How to buy shares online; How to invest in stocks; What are stocks?)
- Derivatives (Futures Options Trading; CFD Trading Tips; CFDs Explained)
Every asset class has its own distinct characteristics and risk/return profile.
| Value proposition | Risk/Return profile | Investment goals | Liquidity | |
|---|---|---|---|---|
| Cash, cash equivalents | safety, liquidity | low risks, low returns | capital preservation | highest |
| Fixed income securities | offers a regular cash flow | low risks (but credit risk exposure), modest returns | steady income flow, capital preservation, liquidity | high |
| Equities | ownership rights in companies | higher risk, dividend income and potential for capital growth | capital gains, dividend income | medium |
| Derivatives, options, futures, CFDs | financial instruments based on an underlying asset | high risk, high returns | speculation | medium |
The difference between financial and physical assets
One way to categorize assets is to see whether the asset derives its value from a physical asset or from a contractual claim. If its value comes from the latter, the asset would be considered a financial asset. Some of the most common financial assets include securities (such as stocks or bonds), currencies and contracts (such as CFDs).
Physical assets include commodities and real estate. However, the word “physical” can be misleading, because investing in physical assets doesn’t necessarily mean you actually possess these objects or materials. Instead, these assets are usually "securitized", allowing you to invest in them indirectly.
For example, you can buy gold as an exchange-traded commodity (ETC) or via an exchange-traded fund (ETF). These offer much better liquidity for the retail investor than holding the assets directly. However, you should not lose sight of the potential risks of underlying assets. The fact that an asset is physical doesn't mean its value can't fall rapidly. For example, in April 2020, the price of crude oil briefly turned to negative as oversupply created storage issues.
Learn more about how you can invest in precious metals here:
Bottom line
As you can see, a wide range of investment opportunities exist beyond investing in publicly traded stocks. It's important to understand asset classes, as each class responds differently to economic and market events. As a general rule, it's always a good idea to build a portfolio consisting of different asset classes, in order to minimize your risk exposure and maximize your returns.
How can you find the right mix of asset classes? First, set your investment goals and determine your risk tolerance. Once you have settled on an asset class mix, you can start picking individual assets.
What else do you need to know about assets and asset classes?
If you would like to deepen your knowledge, check out these articles:
